BL: How can countries manage de-risking?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: Broadly, de-risking is an approach that has gained importance since the global crisis. With weaknesses in balance sheets and excessive leverage, institutions globally are today exploring several ways of de-risking.
As recent as 2015, the surveys conducted by the World Bank on derisking clearly highlighted that access to financial services for banks in general were contracting in several countries, with attendant impact on business transactions. As I see it, there is a need for national authorities to collate information on a more systematic way and use the information contained in ‘big data’ in a more meaningful fashion. The implementation of AML/CFT guidelines across countries is not uniform, which would need to be proactively addressed. With banks being the mainstay of financial intermediation in many countries including ours, strengthening the supervisory mechanism including a move towards risk-based supervision, improvement in skills towards detecting suspicious transactions and better information sharing across jurisdictions are areas that need to be seriously explored.
BL: Why are jobs key to building stability?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: Stability has two faces: financial and social. For us central bankers, the focus is often much more on financial stability and perhaps much less so on the latter. It needs to be appreciated that after the crisis and the subsequent political transition in the MENA region, unemployment levels have risen in some countries in the region, which has severe ill effects on those countries. In this changed setup, it is important to develop the skills of the working population and equip them adequately to meet the challenges of a knowledge economy. Research in this area points out that countries with high levels of internal strife and uncertain economic conditions exhibit low economic growth, which aggravates the unemployment problem even further. Needless to state, the benevolent hand of the government, acting as a facilitator and enabler, will always be there to provide the required logistics and support, which can facilitate the private sector to grow and prosper.
BL: How can the Qatari banks encourage the private sector to play a key role in providing business opportunities?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: The diversification strategy in the country initiated back in 2011 as envisaged in the National Vision 2030 presents ample opportunities for the private sector to help the development of the domestic economy. As the developmental focus gradually shifts from a single pillar to a multipillar growth strategy, the banking sector will have to play a supportive role in catering to the increasing needs of the private sector. Accordingly, the banking sector will need to be creative by designing products, processes and services that can meet the requirements of a broad spectrum of risk classes with varying balance sheet size and risk appetite. The role of SMEs in promoting growth in slow-moving economic cycles is widely acknowledged and it is important that this segment get all the support that it needs. Some evidence on this aspect is already in place: QDB, the leading development bank in our country has taken a key role in promoting SMEs and startups.
Other banks are also responding proactively to serve the business needs of an increasingly diversified economy.
BL: How is Qatar Central Bank adapting to the present evolving International monetary system?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: The international monetary system has been evolving over time to a more flexible setup, facilitated by larger global trade and financial integration. The current monetary and exchange rate arrangement has served the country well over time and we intend to stick to this arrangement, going forward. As we now live in a world of low commodity prices and amidst the talk of a possible shift in the monetary stance in the US, we have been actively managing our domestic liquidity requirements to ensure stable conditions in our financial markets, consistent with our monetary and economic objectives. This has been supported by macro prudential oversight so as to ensure that the financial system stays in good health. Of course, the help and support from the fiscal side has played an important role in this regard.
BL: How did the central bank accomplish today’s success story?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: QCB has been proactive in its goal to ensure financial stability. Accommodative policy during the last couple of years enabled us to ensure sufficient liquidity and facilitated adequate flow of credit to the productive sectors, consistent with our economic diversification strategy.
The supervision of the banking sector has been continuously upgraded with focus on risk-based assessment based on Basel standards. In addition, the supervisory oversight of the financial sector has moved from micro prudential to macro prudential, thereby providing a more comprehensive assessment of the underlying risks and vulnerabilities. A move towards unified regulation of the financial sector was completed in 2012. The relevant laws allow for seamless exchange of information, while addressing the regulatory gaps and overlaps. In coordination with the QFMA and QFCRA, a strategic plan for financial sector regulation covering the three-year period 2013-16 is being implemented. For better assessment of household and business risks, a Credit Bureau was established by the QCB in 2011 and has since become operational. As a move towards greater transparency and information disclosure, the QCB also initiated the publication of an annual Financial Stability Review, beginning 2010. Overall, the continued support to the domestic financial sector and markets, along with strong economic fundamentals improved the confidence of the investors and the global financial community in our economy.
BL: In what ways can QCB further strengthen its banking sector in 2017?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: In recent times, a number of important guidelines based on Basel III standards have been issued to banks as a move towards further strengthening the sector. This includes, in addition to capital standards, maintenance of liquidity coverage ratio, net stable funding ratio and loan-to-deposit ratios as well as capital charges for domestic systemically important banks. Further, conducting regular stress tests on bank balance sheets under various adverse scenarios, including reviewing and validating the internal stress tests conducted by banks takes place on a regular basis. As I mentioned earlier, the macro prudential oversight is continuously being strengthened. Work on developing an early warning system for the financial sector is currently underway. The management of liquidity in financial markets is an ongoing process which has become even more important in recent times. Overall, a continuous assessment of evolving global, regional and domestic developments and responding flexibly as necessary holds the key to ensuring a resilient financial sector.
BL: How far does the drop in oil prices impact Qatari banks?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: As you will recognize, persistent low oil prices presents a challenge for oil exporters. Nevertheless, the economy has been able to withstand the shock arising from low oil prices. Even though lower oil prices affected deposit mobilization especially from the public sector, market liquidity remained comfortable, aided by proactive liquidity management. The private sector has responded to this challenge by increasing its involvement in the domestic economy under the economic diversification strategy of the government. This has led to an increase in demand for private sector credit and inter alia improved the deposits sourced from this sector. With banks being well capitalized with low levels of problem loans, they have also been able to access funds from external sources at competitive rates, which has kept the overall funding costs in check.
BL: Are there any new regulations in the pipeline to meet the sudden and evolving economy in the Arab countries and the globe?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: As I have pointed out earlier, QCB has already implemented Basel III guidelines on capital requirement and liquidity. Some of the macro prudential regulations are also suitably modified to the changing regulatory and supervisory environment. Thus, our banking system is broadly equipped to meet the challenges that may arise from global and regional interactions. You may agree, regulation and supervision are continuous processes and constantly evolve as per the circumstances and relative conditions. Further, as in the past QCB always takes proactive actions rather than reactive to resolve the issues in a timely manner.
BL: A recent report states: "Economies that both improve the efficiency of regulatory procedures and strengthen the legal institutions that support enterprise, trade, and exchange are better able to facilitate growth and development," how and why? How does this point apply to Qatar?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: Developing efficiency of regulatory procedures, strengthening infrastructural facilities to support enterprises, trade and exchange ultimately reflects on the resilience of the economy and thereby growth and development. These will facilitate healthy interactions in the market place and protect important public interest without hindering development. As observed by the Doing Business Report-2014, these benefits are the essence of development of these market infrastructures. The conducive legal and regulatory infrastructure in Qatar facilitate healthy growth in trade and investment. Adapting to the best international practices and regulatory environment, financial institutions, payment and settlement system and the financial markets in Qatar plays a supportive role to the overall economic development.
BL: How can banks reduce the complexity and cost of complying with regulations?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: As you are aware, fall-out of the financial crisis, global regulatory framework and the compliance function of the financial sector has undergone a sea change. The landscape has gone global for compliance of prudential, regulatory, supervisory and legal requirements. Thus, in addition to the domestic requirements, global requirements on compliance also have increased significantly. To name a few, these global compliance requirements include that relating to Financial Action Task Force, Anti-Money Laundering, Know-Your-Customer, Foreign Account Tax Compliance Act, etc. Along with increase in compliance requirements, the complexity of prudential regulation is also increasing due to interaction between the internationally accepted best practices and regulations.
It is generally accepted that technology integration is answer to the increasing complexity and cost of compliance to a certain extent. However, there is no universal solution, since each bank is faced with its own risk profile. Identify the processes which can be automated, continuously monitor key risks and controls, invest in right technology, etc., are some of the measures banks can adopt to reduce the complexity and cost involved in the processes of compliance.
BL: In what manner can the right policy choices deliver significant benefits to Qatar's financial sector?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: In order to enable Qatar’s financial sector to play an important role in the country’s economic diversification strategy to realize the goals of Qatar National Vision 2030, it is necessary that banking system continue to remain sound and safe. In this direction, QCB has put greater emphasis on financial stability objective in recent years. As noted earlier we update and strengthen our macro prudential measures, micro prudential regulations and supervisions and in tandem with the best international practices. In addition, stress tests and early warning system are also being enhanced. The sharp fall in oil prices since mid-2014, however, led to a decline in public sector deposits, which, in turn, impacted overall liquidity in the system. In this environment, QCB actively managed liquidity through adjustments in T-bills/bonds auctions to ensure comfortable liquidity in the system and thereby facilitate adequate flow of credit to the productive sectors to support economic diversification on one hand and financial stability on the other. It also maintained its accommodative policy stance to support growth with stability. The right policy-mix, in turn, brought significant benefits to the financial sector – banking system recording robust growth in assets while maintaining high asset quality (NPL below 2%), remaining well-capitalized (CAR comfortably above the regulatory minimum) and profitable (return on average assets at around 2%).
BL: What are the present and future challenges of QCB that you would like to tackle?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: Low international oil prices pose the main challenge today and in the near future and our policy aims to contain its adverse impact on the economy and the financial system. In response to low oil prices, government has further strengthened economic diversification through greater private sector involvement, while prioritizing its spending plan to improve efficiency. This has resulted in robust credit demand from private sector, while low oil prices have also led to a decline in public sector deposits and moderation in private sector deposit growth. In this environment, QCB has been actively managing liquidity to ensure comfortable liquidity in the system and thereby facilitate adequate flow of credit to the private sector in a cost effective manner to support economic diversification as well as financial stability. At the same time, macro prudential regulations are being strengthened to maintain resilience of the financial system. If low oil prices persists in future, we will continue actively managing liquidity in the system, while strengthening macro prudential regulations. Another possible challenge going forward could be the reversal of US monetary policy stance, to which we remain vigilant and prepared.
BL: What are the plans for 2017?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: We want to continue with the implementation of various macro prudential measures as they are being implemented in a phased manner and also aim to enhance our stress testing mechanism as well as the early warning system to promote financial stability. As regards monetary policy, we want to respond flexibly to the evolving domestic and international macroeconomic and financial market developments. At the same time, we will continue to improve the financial market infrastructure as well as customers and investors’ protections in the country.
BL: What are your comments on Qatar's economy and its international investments?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: Qatar’s economy has performed relatively well despite low oil prices and global uncertainties, partly helped by the country’s early adoption of economic diversification strategy. The large financial buffers built during periods of high oil prices in the past provides flexibility.
BL: There are recent rumors about having tougher times surrounding the year 2017, do you agree?
H.E. Sheikh Abdulla Bin Saoud Al-Thani: I am optimistic about 2017. We have dealt with low oil prices strategically and used it as an opportunity to reform and restructure the economy on one hand and raise efficiency and productivity on the other. Moreover, financial system remained sound and safe despite adverse developments reflecting the right policy mix. Overall, effective coordination between monetary and fiscal policy have yielded positive results and will continue, going forward.
